Should I pay off my mortgage or invest in another property?

Knowing when to make your second investment is 75% maths and 25% emotion

No two people are the same. The decision to either pay off a mortgage or invest in another asset will depend entirely on the person, their assets, their liabilities and their aversion to risk and debt.

As finance expert Noel Whittaker puts it, "The level of gearing a borrower is comfortable with will depend on three things: assets, income and stomach muscles."

So, if you’re trying to figure out whether to pay off your mortgage or invest in another property, ask yourself, "How’s my cash flow and am I ready to take on a bit of risk?"

Financial considerations

Brenton Tong, Head of Strategy at Financial Spectrum Financial Planners

Compounding interest

Financial expert Noel Whittaker says the effects of compound interest demonstrate why it's a good idea to look for an additional investment as your original loan term comes to an end.

"How compound interest works is that as the loan term increases, small increases in payments make a big difference," he says.

For instance, if you owe $150,000 at 6.5% interest being repaid over 30 years, your monthly repayments will be $948 and you will pay a total of $191,000 interest. If you pay an extra $170 a month, you can take 10 years off the time it takes you to pay your mortgage and you will pay $118,000 in interest, saving yourself $73,00. To reduce the loan term from 30 to 10 years, you would need to pay an extra $170 a month again - taking total repayments to approx. $1703. and paying $54,380 in interest. But once the loan term is down to about 10 years, extra payments don’t help borrowers as much as if extra payments were being made on a 30 year loan.

"Once you reach a certain point in the loan term, about 10 years, compounding interest doesn't matter as much any more. Once you reach a 10 year term, you’re better off using your money to invest. If the mortgage is under control, you’ll save little to no interest on upping the payments and you’re missing out on what could have been five to 10 years growth if you invested in another property," Whittaker says.

Emotional considerations

Know your life plan

Brenton Tong’s tip for people looking to invest in a second property:

Brenton Tong had this to add on making up your mind about taking on a second home or investment loan.

"The decision to invest in another property when you already have a home loan is a pretty big decision because you’re taking on more debt - probably the most important consideration is your financial position at the time when you’re going to be looking at doing that - and the number one factor when you’re looking at your financial position is your cash flow.

"You can have an enormous amount of equity in your property and you could almost have your property paid off, but if you don’t have the available cash flow to fund additional debt then you’re going to be putting yourself in harm's way. If, on the other hand, your debt is quite high and your equity is quite small yet you still have an abundance of cash flow, then quite possibly you might be in a position where you can get into property investment much earlier than you think you can."

Comparing home loans is a great way to grow your knowledge about your options.

Compare investment home loans

Rates last updated February 27th, 2017.

Greater Bank Great Rate Home Loan - Discounted 1 Year Fixed LVR ≤85% ($150K+ Investor)

Interest rate now 3.89%

January 16th, 2017

Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed ($150K+ Investor)

Interest rate now 3.69%

January 16th, 2017

Greater Bank Ultimate Home Loan - Discounted 3 Year Fixed LVR ≤85% ($150K+ Investor)

Comparative rate increases by 0.01% | Interest rate increases by 0.05%

January 16th, 2017

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Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment
loans.com.au Essentials - Variable (Investor, P&I)
Loans.com.au offer a low interest variable home loan with no application fee.
3.79% 3.81% $0 $0 p.a. 80% Go to site More info
Australian Unity Wealth Builder Investor Package Home Loan - Variable
An investment loan with no ongoing fees and borrow up to 90% LVR.
4.19% 4.22% $600 $0 p.a. 90% Go to site More info
Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed ($150K+ Investor)
Lock in your interest rate for 1 year when you borrow over $150000 for your investment property.
3.69% 4.56% $0 $375 p.a. 85% Go to site More info
Greater Bank Great Rate Home Loan - Discounted 1 Year Fixed LVR ≤85% ($150K+ Investor)
Lock in your interest rate for 1 year and pay no application or ongoing fees.
3.89% 4.39% $0 $0 p.a. 85% Go to site More info
3.94% 4.53% $0 $375 p.a. 85% Enquire now
IMB Essentials Home Loan - LVR <=90 (Investor Only)
A competitive home loan for investors.
4.09% 4.09% $0 $0 p.a. 90% Go to site More info
ING DIRECT Fixed Rate Home Loan - 3 Year Fixed Rate (Investors)
Enjoy a competitive 3 years fixed rate with $0 ongoing fee.
4.09% 4.56% $499 $0 p.a. 95% Enquire now
Westpac Flexi First Option Investment Loan  - 3 Years Introductory Special Offer P&I
A special discounted variable interest rate for you next investment purchase.
4.19% 4.56% $0 $0 p.a. 95% Enquire now
St.George Portfolio Home Loan With Advantage Package - $500k to $749k (Special Discount)
Pay no application fee when you package your equity loan with St.George's Advantage Package.
4.94% $0 $395 p.a. 90% Enquire now
Westpac Rocket Investment Loan - Principal and Interest
Use Westpac's variable home loan to purchase your next investment property.
5.56% 5.70% $600 $8 monthly ($96 p.a.) 95% Enquire now
Commonwealth Bank Wealth Package Fixed Home Loan - 2 Year Fixed (Investor) P&I
Enjoy a 2 years fixed rate with great discount and savings with $0 upfront establishment fees and $0 annual credit card fees - all for an annual package fee of $395.
4.19% 5.30% $0 $395 p.a. 95% Enquire now

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Adrian Barclay

Adrian spends most of his working hours writing about home loans and everything property, as well as interviewing finance experts.

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8 Responses to Should I pay off my mortgage or invest in another property?

  1. Default Gravatar
    colleen | February 24, 2015

    I am 61 and my husband 58. I no longer work but my husband still does. we have one property valued at around 380,000
    we have 300,000 in bank and have kept a home loan of 100,000
    this is offset by money in the bank and the rest of the money is earning interest at 3.6%.

    My question is do i pay of the mortgage, we will still have 200,000 in case we need it.
    my husband earns 95000 gross per year. and has superannuation. my superannuation is part of that 200,000. what is the equation for it to work for an investment property?. we would be hoping to resell the property in 5 years. how much rent would you need to be getting if you paid 260,000 for a property.

  2. Default Gravatar
    RAELENE | January 8, 2015

    My husband and I have recently bought our second investment through a brokerage agency.At the time my husband’s income was treble to what it is now.We also own another investment property which is more than 40 years old, we pay tax on the rental income from this property as is more than the expenses.We are also paying off a mortgage.Would we be better off selling the old property and pay off our mortgage and keep the new investment or not

  3. Default Gravatar
    JD | June 7, 2014

    Hello, we currently own our home in FL, with only $25K owing on an equity line of credit. We also owe $12,500 on a bank credit card. Our home is valued at approximately $275K. We live in Australia & pay $1100/month rent. Would it make sense to purchase a home or unit in Australia instead of paying rent each month? We rent our home out in FL about 6 months/year which covers most of our monthly expenses. Thank you

  4. Default Gravatar
    Teena | October 20, 2013

    Currently have two properties, however have lost my job, have rental coming from one property of 1700 and another coming in at 1500 a month, currently paying off both home and investment property, ANZ won’t structure or refinance differently for me, also have a line of credit am up to 50 now, limit is 80, am running out of ideas to save both homes, is there anything I can do apart from selling one, now before it gets worse, or is there a way to keep both going, am on temporary work as of Monday, but need some help fast,,!

    • Staff
      Shirley | October 21, 2013

      Hi Teena,

      Thanks for your comment.

      Please see this page about your options, otherwise it may be worthwhile to seek financial counselling.

      Hope this helps,
      Shirley

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